This document is available in three formats: this web page (for browsing content), and
PDF (comparable to original document
formatting). To view the PDF you will need Acrobat Reader, which may be downloaded from the Adobe site. For an official signed copy, please contact the
Antitrust Documents Group.

DEPARTMENT OF JUSTICE

STATEMENT OF

ANNE K. BINGAMAN
ASSISTANT ATTORNEY GENERAL
ANTITRUST DIVISION
UNITED STATES DEPARTMENT OF JUSTICE

Submitted to the
Committee on Commerce, Science and Transportation
United States Senate

On Telecommunications Policy

March 3, 1995

Mr. Chairman and Members of the Committee:

I am pleased to be here today to testify on behalf of the Administration
about the vital issue of telecommunications reform. I applaud this Committee
and its leaders, Senator Pressler and Senator Hollings, for their attention
and important effort to foster serious telecommunications reform. I
understand that members of the Committee are formulating comprehensive
legislative proposals, which are so far reflected in drafts.

The health and vitality of this important sector of the economy have
received so much attention from this Administration not only because
it will make a difference in the way our citizens live and work, but
because it is critical to America's prosperity in the 21st Century.
The key test for any telecommunications reform measure is whether it
helps the American people by providing benefits to consumers and by
spurring economic growth, including higher incomes and job creation.
The Administration believes that the way to achieve those goals is through
real competition. Real competition provides consumers with lower prices,
higher quality and more choice -- as the history of long-distance competition
illustrates. Real competition also is critical to the continuing competitiveness
of U.S. companies, which will create jobs and power America's continued
leadership as this sector grows at home and abroad. As the President's
Council of Economic Advisers concluded last year, federal legislation
along the lines urged by the Administration in its White Paper could
add several hundred thousand new jobs here in three years.

The Administration's fundamental vision for the telecommunications
future is simple to state, but breathtaking in its implications: Every
company will be permitted to compete in every market for every customer.
We want that day to come as soon as possible. We would be naive, however,
if we expected an uncomplicated transition from the regulated monopolies
that characterize many segments of the telecommunications industry to
fully competitive markets. To paraphrase Thomas Jefferson, we cannot
expect to be transported from monopoly to competition in a featherbed.

Vice-President Gore put it best at the Federal-State-Local Telecommunications
Summit held earlier this year: "Competition is always better than monopoly.
But monopoly power must never be confused with competition. Two enemies
of competition are monopoly power and unwise government regulation.
We must remember, after all, that the goal we seek is real competition.
Not the illusion of competition; not the distant prospect of competition."

There is today, we believe, a broad, bipartisan consensus in favor
of moving telecommunications policy out of the courts and into the statute
books so that Congress, representing the public, can craft the kind
of comprehensive framework for competitive telecommunications that the
nation deserves. The Administration is eager to work with members of
both Houses of Congress to achieve this important goal. Until passage
of such legislation, the Department of Justice will move forward under
the Modification of Final Judgment to promote local telephone competition
as a basis for easing the restrictions on the Regional Bell Operating
Companies. But I cannot emphasize enough that moving forward in court
is a second-best alternative. Comprehensive, competition-promoting reform
legislation is by far the better course for the country.

In the balance of my testimony, I would like to cover three areas:

First, I would like to put the discussion of telecommunications competition
into context, by explaining how we got here and how the nation has benefitted
from the competition in telephone markets that has occurred thus far;

Second, I would like to suggest why providing even greater competition
in both telephone and cable television markets is critically important
for American consumers and industry;

Finally, I will identify the fundamental challenges that policymakers
face in promoting telecommunications competition.

The Break-Up of AT&T and the Telecommunications Revolution

The telecommunications revolution -- the merging of voice, video and
other data transmission and the proliferation of new telecommunications
products and services -- has been one of America's leading technological
and economic success stories. At bottom, the key reason is the economic
climate of competition that nourishes the creative genius of scientists,
engineers and businesses.

An indispensable element in freeing that creative genius to innovate
and bring new products and services to market has been a public policy
generally dedicated to promoting competition. Nowhere is this more evident
than in the case of long-distance telephone services, where through
the efforts over two decades of the Justice Department and Judge Harold
Greene, and the work of the FCC, competition has made enormous progress.
We should not forget, however, the hurdles that effectively slowed competition
before the success in 1982 of the Justice Department's antitrust suit.
Long after competition in long distance service and communications equipment
became technologically and economically feasible, AT&T frustrated
consumer choice and actual competition through abuse of its monopoly
control over local networks.

This story is not merely a matter for the history books. It is a cautionary
tale that illustrates the persistence of monopoly in telecommunications
markets. And it refutes the unsubstantiated notion that telecommunication
monopolies can only exist if the coercive power of government keeps
out competitors. In fact, AT&T for many years proved itself quite
adept, through use of its local monopoly, at keeping competitors out
of the long distance and equipment manufacturing markets, in spite of
the best efforts to the contrary of regulators, the Justice Department
and the competitors themselves.

The Persistence of Monopoly

AT&T used the local monopoly to discriminate against competing
long distance carriers in terms of the type, quality and price of interconnection
with the local network, preventing most consumers from buying service
at lower prices from AT&T's competitors and inconveniencing consumers
who did. For instance, consumers who used a competitor had to dial 23
digits to complete a long distance call, while AT&T customers only
had to dial ten or eleven digits. Similarly, consumers who preferred
other manufacturers' equipment discovered that they could not connect
that equipment to the local telephone network. Moreover, the Department
found that AT&T's manufacturing subsidiary, Western Electric, was
overcharging the Bell system for equipment. Because these overcharges
contributed to the Bell Companies' rate bases, they had the effect of
inflating the prices that captive ratepayers paid for phone service.

Competitors detected AT&T's anticompetitive conduct and fought
it in the courts and before regulators. The result more often than not
was one step forward, one step back -- incremental progress that rarely
could keep up with AT&T's ability to find new ways of impeding access
to the local networks or disadvantaging other equipment manufacturers.
As long as AT&T controlled the strategic bottleneck of a local telephone
monopoly, litigation and regulation could not hope to promote free competition
in long distance and equipment markets or protect captive ratepayers
from inflated prices.

Indeed, the problem was related partly to the nature of regulation
itself. With regulation constraining rates and profits in the local
market, AT&T had the incentive to use the local monopoly to increase
profits in the long distance and equipment markets. As long as consumers
had no choice of local service provider, structural separation that
prevented the regulated monopolist from participating in the other markets
was necessary to prevent the abuses that plagued the industry and thwarted
competition.

Regulators and would-be competitors were not the only ones stymied
by the problem of the AT&T telecommunications monopoly. The Justice
Department sued AT&T twice, in 1913 and in 1949, before bringing
the suit that resulted in the MFJ. Those first two efforts to protect
competition in telephone markets ultimately failed, because the relief
obtained was not comprehensive enough.

But the third time it worked. The case filed against AT&T in 1974
was a nonpartisan undertaking to vindicate the principle that underlies
the antitrust laws and, indeed, our economic system: Open competition
on the merits is superior to regulated monopoly. The Department began
its investigation in the Nixon Administration, filed suit during the
Ford Administration, then pursued the case through the Carter Administration
and into the Reagan Administration, with AT&T fighting every inch
of the way. AT&T ultimately came to terms with Assistant Attorney
General Bill Baxter and agreed in 1982 to the entry of the consent decree
that we now call the MFJ.

As you know, the structural separation of the local exchange from
other telecommunications activities was the essence of the MFJ. It required
AT&T to divest itself of its local exchange businesses, resulting
in the creation of the seven Regional Bell Operating Companies, sometimes
called the RBOCs or Bell Companies. These Bell Companies -- independent
of each other and of AT&T -- retained local telephone monopolies
within their respective regions, subject to the requirement that the
Bell Companies provide consumers equal, nondiscriminatory access to
the long distance company of their choice.

The complete divestiture of the Bell Companies from AT&T's long
distance and equipment operations removed AT&T's ability to use
the local monopoly to thwart competition in the long distance and equipment
markets. The MFJ also removed the RBOCs' incentive to impede competition
in those markets through its "line of business" restrictions, which
continue to prohibit the Bell Companies from providing long distance
services and from manufacturing communications equipment. These restrictions
protect against the recurrence of the specific harm that the MFJ remedied
-- use of the regulated local monopoly bottleneck to hurt competition
in other markets.

The MFJ retained the historically complementary roles of the FCC and
the Department of Justice. Since its creation in 1934, the FCC has had
Congressionally assigned responsibility for establishing the "rules
of the road" for the telecommunications industry. Therefore, after entry
of the MFJ, the FCC established the specific rules for implementing
the decree's equal access requirements and created a process by which
consumers could presubscribe to their preferred long distance carrier,
both vital to facilitating the competition made possible by the MFJ.
The FCC has continued to help open the long distance and equipment markets
to competition.

The Benefits of Competition

The MFJ has benefitted the country spectacularly. Separating the long
distance market from the local monopoly has increased competition dramatically,
as MCI, Sprint and hundreds of smaller carriers have vied with AT&T
to provide long distance service to businesses and residences. The New
York Times recently reported that in 1994 more than 25 million residential
customers changed long-distance carriers -- spotlighting the MFJ's incredible
success in bringing real choice to consumers. Residential long distance
rates have fallen some 50 percent since the break-up. Because of these
lower prices, Americans are communicating with each other, by phone,
fax and computer, more than ever before. We are closer to each other
and in better touch with each other, for business and pleasure, because
of the MFJ and its benefits. The impact of this change cannot be measured,
but it unquestionably is profound and has changed the nation for the
better.

Improvements in quality have accompanied lower prices and increased
output: The United States now has four fiber optic networks spanning
the country, another by-product of competition. Incidentally, AT&T
lagged behind its competitors in building a fiber optic network -- not
surprising given that monopolists often are not the most innovative
companies. These networks make possible all kinds of new services and
enhance others, including the Internet. Similarly, businesses and consumers
enjoy lower prices, more choice and better quality in communications
equipment, as competition has eroded AT&T's power in that market
and forced it to compete for customers.

In short, the MFJ has enabled the United States to maintain its technological
leadership in telecommunications. Nations that have stuck to the old
monopoly model of telephone services have fallen behind. That is why
many are now trying to emulate us, rather than the other way around.
But we also should never lose sight of the fact that there is always
room for more competition; line-of-business prohibitions should continue
only as long as necessary.

The Need For And Benefits Of Even Greater Competition

Now is certainly not the time, however, for America to rest on her
laurels. Much more needs to be done to promote competition in telecommunications.
For instance, competition has a long way to go in video services. To
be sure, consumers now have an unprecedented degree of choice in video
programming, as the spread of cable technology has introduced competition
with traditional broadcasting. But, with a few exceptions, cable television
operators enjoy monopoly franchises in each locality.

These monopolies, however, are not "natural," and I am hopeful that
their days are numbered thanks to technological advances. For example,
a number of the Bell Companies have announced plans for upgrading their
telephone networks to deliver video programming. Continuing advances
in satellite television likewise promise a challenge to cable monopolies.

Competition also has yet to reach local telephone service. Here, too,
technological innovation offers foreseeable challenges to monopoly control.
Just as telephone networks can be upgraded to provide video service,
cable television systems are expected relatively soon to carry telephone
traffic. In addition, wireless services such as cellular and specialized
mobile radio, while currently relatively expensive, are growing rapidly
throughout the country. The FCC has begun to auction off additional
spectrum for yet another form of wireless communication, Personal Communications
Services (PCS). Still, it is important to keep in mind that these alternatives
are largely prospective. They are not yet widely available and affordable,
and it is not yet clear when they will be. And even consumers who eventually
choose to replace their local telephone company with a wireless or a
cable-based alternative will continue to need to interconnect with the
old phone company to complete most of their calls. The kind of competition
that develops depends on the terms of that interconnection.

Technology by itself will not be enough to break down the barriers
to competition in video and voice, for the simple reason that not all
of the barriers are technical. Some of the most formidable, in fact,
are legal and economic.

Policy Challenges Ahead

Thus, the challenge confronting all telecommunications policymakers
-- in Congress, in the Executive branch, and the states -- could not
be more clear: To encourage greater competition throughout the telecommunications
industry in a way that does not distort the marketplace or pose dangers
to consumers. In particular, as long as the RBOCs have a monopoly over
local phone service, they will have -- in the absence of the MFJ line-of-business
restriction or adequate safeguards provided for by legislation -- the
incentive and the ability to hurt competition in other markets through
cross-subsidization and discrimination.

Ultimately, effective competition in local telephone markets will
provide the best protection against the RBOCs' ability to leverage their
local telephone monopolies into other markets. Until local telephone
markets are competitive, entry tests and structural safeguards -- such
as separate subsidiaries that help regulators analyze pricing, cross-subsidization
and discrimination -- are necessary to ensure that local telephone customers
are not charged with the costs of long-distance service and manufacturing
and that the other markets are not distorted by the RBOCs' local monopoly.

Promoting Competition in Local Telephone Markets

Let me emphasize that the point is not how to keep the RBOC's out
of other markets, but rather how to let them in as quickly as possible
without endangering competition in those other markets. The way to achieve
that goal is to promote real competition in the RBOCs' own local markets.
At this point, there appears to be a growing consensus about the steps
that are appropriate for fostering competition in the local telephone
markets. First and foremost, of course, legal and regulatory barriers
to competition must be removed. Comprehensive federal legislation is
uniquely capable of accomplishing that step.

Other steps that are supported by the Administration and that are
becoming widely agreed upon include:

implementation of arrangements for mutual compensation and interconnection
that allow entrants to compete on a level playing field with the RBOC;

implementation of unbundling and other arrangements for resale
of local services on terms that make competition in local markets
feasible;

implementation of local dialing parity;

implementation of number portability so that customers can switch
local service providers as easily as they already can switch long
distance carrier; and

implementation of arrangements for access to poles and conduits.

The Administration strongly supports the inclusion in legislation
of such steps to open the local loop. Likewise, the Administration supports
legislation that would give the FCC the responsibility for formulating,
within a specified time after passage, rules for the implementation
of steps to open the local loop. Although it is appropriate for states
to have a role in actual implementation -- since one size may not fit
all -- there still needs to be a national policy creating the
basic framework.

The Administration supports provisions that would apply unbundling
and interconnection requirements only to carriers with market power.
Because the threat that concerns us arises from market power, it would
be needlessly regulatory to apply requirements in the absence of market
power. The Administration also believes that the RBOCs should be permitted
in comprehensive legislation to offer "incidental" long-distance service
to facilitate the provision of wireless, cable and certain other services,
along the lines provided for in last year's bill, S. 1822.

Even though there is broad agreement on the necessity of these steps,
however, there remains the question of when the Bell Companies should
be allowed to offer long distance services and on what terms. At one
extreme is the idea that the Bell Companies should not be allowed to
foray into other markets, such as long distance, until after they experience
enormous losses of market share in the local markets over which they
now exercise monopoly control. This approach, however, could sacrifice
for too many years any benefits in added competition and innovation
that the RBOCs might be able to bring to the long distance and other
markets. It also conflicts with our fundamental vision of allowing every
company to compete in every market.

At the other extreme is the idea that restrictions on the RBOCs should
be lifted on a certain, preordained date, no matter what actually happens
in the marketplace. By assuming without any basis in experience that
competition eventually will come to currently monopolized markets, this
approach would seriously endanger the progress of the last ten years
in opening the long distance market to competition.

We think neither extreme is correct. We support the middle ground
of competition. In our view, it would be too great a risk to competition
to let the RBOCs enter the long distance market immediately upon the
first halting steps toward meaningful local competition. Entry should
come only after an assessment made within 180 days of application in
the market under a standard such as Section VIII(C), a responsibility
that should be delegated to the Department of Justice, the agency that
has applied that standard for many years.

Although the steps that I listed should foster the emergence
of local competition, it would be unwarranted to assume that competition
will in fact emerge or how fast it will emerge. On the one hand, the
steps may not be sufficient. On the other hand, competition may flourish
before some are fully accomplished. There simply are no guarantees as
to whether and how fast local competition will develop. By applying
this market-based test for long distance entry, we increase the incentive
to open up local markets to real competition quickly and effectively.

The ultimate efficacy of these steps depends on the resolution of
dozens and dozens of complicated implementation issues. To say that
unbundling must take place, for example, begs the questions of the price
of the unbundled network elements, the relation between those prices
and the retail price of the bundled service and what sort of volume
discount structure can be applied to either set of prices. The answers
to these questions in turn will determine the marketplace effectiveness
of the unbundling.

Some legislative proposals contemplate requiring resolution of implementation
issues primarily through private negotiations between the RBOCs and
would-be interconnectors, hopefully numbering in the hundreds and even
thousands, with ultimate review by state commissions case-by-case, issue-by-issue
to resolve disputes. Although the option of private agreement
on interconnection is appropriate, we believe it would be a mistake
to place primary reliance on such a mechanism and attempt to require
it. It would be a lawyer's dream, replacing a unified, national approach
with dozens or even hundreds of negotiations and administrative and
perhaps court litigation in each state, each addressing new and complex
issues. And if the fragmented negotiation approach is coupled with automatic
RBOC entry into long distance on a fixed date, in the midst of all this
will be a clock ticking inexorably toward RBOC long distance entry,
without regard to the emergence of local competition.

The complexity of these implementation issues is exacerbated by the
tremendous leverage that the RBOCs as monopolists would bring to any
negotiations on interconnection terms. They can in myriad ways favor
certain classes of competitors or individual competitors at the expense
of others. They can resolve issues that matter to certain competitors
and not others since companies have different needs. Smaller competitors
in particular could have a difficult and expensive time negotiating
and taking appeals.

The underlying point is that we cannot assume that taking some series
of specified steps will result inevitably in the development of local
competition. The real test will be what is happening in the marketplace
itself: Have competitors been able to enter? Are they able to serve
a variety of customers in the geographic area that the RBOC seeks to
serve? Is the availability of such competing service expanding? Are
competitors encountering significant barriers to such expansion?

The policy should not be a test based on market share, but
a judgment, based on market facts, whether the RBOC entry presents
a substantial possibility of impeding competition in other markets.
The responsibility for making that judgment should be assigned to the
Department of Justice, based on the expertise in and understanding of
competition in telecommunications markets that we have developed over
the quarter of a century since the beginning of the AT&T investigation.
Additionally, the FCC should review proposed entry under a public interest
standard, based on the expertise and understanding of telecommunications
that it has developed since its creation in 1934.

Legislation that does not include such a review of actual market developments
risks putting the RBOCs' incentives entirely in the wrong place -- encouraging
them to obstruct and delay the emergence of meaningful competition until
the gun sounds to allow them to race into other markets. Then, still
enjoying the advantages of a monopoly over local service, they would
be in a position to reduce rather than increase competition in those
other markets.

A penalty scheme alone may not appreciably change these incentives.
Such a scheme entails a considerable amount of uncertainty as to whether
there would be sanctions imposed and, if so, how significant penalties
would be. The balance of uncertain high penalties against the certain
and enormous financial benefit of keeping the local loop closed illustrates
that the RBOCs retain the incentive of maintaining their control of
local telephone. Moreover, given that the underlying requirements may
be very qualified or worded in the negative, it may be difficult to
prove a violation under any conceivably reasonable standard.

This is not to say that penalties should not be available to the FCC
and to state regulators for failure to comply with interconnection requirements.
It is to say that the stick of penalties is an inadequate substitute
for the carrot of conditioning RBOC entry into long distance on the
development of local competition. An excessive reliance on penalties
would spawn more litigation and less interconnection.

If, on the other hand, the RBOCs must demonstrate to the Department
real marketplace facts before they are allowed into long distance and
to the FCC that it is in the public interest for them to enter long
distance, they have incentives to cooperate in the opening of the local
loop. The consideration of RBOC applications for entry by the two agencies,
of course, should be simultaneous and subject to specified time constraints
-- such as the 180-day period provided in the legislation last Congress
-- in order to avoid unnecessary delay and uncertainty.

This approach enjoyed widespread, bipartisan support last year. The
legislation that this Committee reported out on a 18-2 vote included
an entry test to be applied by the Department of Justice, as did the
bill passed by the House with more than 420 votes. A judicious combination
of carrots and sticks is the best way to achieve our common goal of
providing consumers the benefits of competition rather than the protection
of a regulated monopoly.

Let me add, however, that omitting a market review from reform legislation
does not mean that review will not occur. It means, rather, that such
review will occur in the form of scores of AT&T-type antitrust suits
filed in courts across the country. Resources that should be devoted
to building the NII will be diverted to piecemeal litigation, which
quite possibly will yield inconsistent results in the end -- assuming
such litigation does end. That is why the Administration strongly supports
a comprehensive national approach that takes advantage, in advance,
of the Department's two and half decades of intensive experience of
assessing competition telecommunications markets.

With regard to RBOC entry into equipment manufacturing, as opposed
to long distance, there are a number of proposals. The dialogue on this
issue is constructive in reaching our ultimate goal of allowing RBOC
participation without threatening the burgeoning competition that exists
in this segment of the industry. The Administration supports RBOC entry
into manufacturing as long as it is accompanied by appropriate safeguards,
including a strong requirement for use of a separate subsidiary. The
Administration believes that the RBOC monopoly business should be separated
from other RBOC businesses, but not that there need be multiple separate
subsidiaries. The Administration also has supported a notification-and-waiting-period
procedure under which an RBOC would submit relevant information about
its proposal to the Department of Justice, which could investigate and
sue to enjoin the proposed entry.

Promoting Competition in Video Services

Local telephone is not the only market in which reform can replace
regulated monopoly with open competition. Legislation should encourage
competition to cable television from other firms and technologies, which
will reduce the market power that existing cable operators maintain
in their markets throughout the country. Statutory and regulatory restrictions
that prevent such competition should be removed, but in conjunction
with appropriate safeguards and removal of all actual and effective
legal barriers to cable company competition for local telephone service
(and promulgation by the FCC of interconnection requirements). We encourage
legislation that allows telephone company provision of video programming
in their local service area upon removal of local telephone entry barriers
and promulgation of interconnection requirements.

We recognize that the local telephone companies have challenged, with
some success, the prohibition on providing video programming in their
local service areas in court, even while enjoying, in most instances,
continued protection of their local telephone monopolies from competition
by cable operators. Nevertheless, comprehensive and balanced legislative
reform with appropriate safeguards -- not piecemeal litigation -- is
the fairest, most sensible and most orderly way to move forward.

The Administration endorses inclusion of provisions in the legislation
that would prohibit telephone and cable television companies from acquiring
each other within the same service territory. Public policy should promote
competition between methods for delivering telecommunications services,
and the existence of "two wires" going to each home remains crucial
at this time to such competition. For this reason, the Administration
believes that for a limited time there should be a general prohibition
on mergers in the same service territory, subject to certain limited
exceptions, such as for rural areas. Any exception should be subject
to ordinary antitrust review. We look forward to working with the Committee
on this issue.

Conclusion

The time has come to do what only effective legislation can accomplish:
Move telecommunications policy out of the courtroom and into the hands
of the two expert agencies charged with protecting the broad public
interest in telecommunications (FCC) and competition in particular (DOJ,
which helped launch the telecommunications revolution with its suit
against AT&T).

The Administration looks forward to continuing to work with the Congress
in a bipartisan fashion on an expeditious basis to provide the fair
and competitive environment for the telecommunications industry that
its participants and consumers deserve. The time to pass legislation
is now. The nation needs a legal framework governing the telecommunications
industry that promotes open competition as vigorously as possible. Removing
existing legal barriers to entry in various markets is essential, but
we should not ignore the lessons of history in this vital sector. Truly
effective competition requires a truly level playing field, where no
competitor is able to use its monopoly or market power in one market,
such as local telephone services, to disadvantage competition in other
markets. Ultimately, competition, not regulation -- and certainly not
unfettered monopoly -- will provide the best guarantee of better quality,
lower prices, more jobs, expanded export opportunities and more rapid
innovation in the telecommunications industry.